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Cross-Border Swaps Reprieve Is Close

U.S. and EU said to be near agreement on short-term relief from Dodd-Frank for overseas derivatives deals.

U.S. and European Union (EU) officials are nearing a deal to grant EU swap-trading platforms a reprieve from Dodd-Frank Act rules set to take effect next week, according to two people with knowledge of the negotiations.

The agreement would free trading platforms in the EU from U.S. rules for swap-execution facilities, or Sefs, at least temporarily, according to the people, who spoke on condition of anonymity because the talks are private. The negotiations between the Commodity Futures Trading Commission (CFTC) and European authorities are still under way and the agreement could change before Feb. 15, when the rules requiring the use of platforms take effect, the people said.

The international reach of CFTC rules has been among the most contentious issues between the Washington-based regulator and financial firms that operate around the world. Wall Street lobbying groups that represent banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. sued in December, seeking to limit the agency’s ability to impose rules outside the U.S.

The International Swaps and Derivatives Association, one of three groups that filed the lawsuit, said in December and January that traders outside the U.S. have been avoiding trading with U.S. firms since an Oct. 2 deadline for platforms to register with the CFTC. As a result, the U.S. and European markets have become increasingly disconnected, the group said.

Platforms owned by Tradeweb Markets LLC, ICAP Plc, MarketAxess Holdings Inc., trueEX LLC, and Bloomberg LP, parent of Bloomberg News, have temporarily registered with the CFTC. The Sefs facilitate transactions between banks and also between banks and asset managers or other clients.

The EU Commission and CFTC reached a deal last year, known as the Common Path Forward, that settled some swaps rule clashes while setting out a plan for further talks on others.

“We continue to discuss the issues mentioned in the Path Forward,” Chantal Hughes, a spokeswoman for Michel Barnier, the EU’s financial services chief, said in an email, without providing further detail.

Global regulators moved to increase oversight of the swaps market after credit-default trades helped fuel the 2008 credit crisis. The 2010 Dodd-Frank law requires the CFTC to enact rules to lower risk and increase competition and transparency by having swaps guaranteed at central clearinghouses and conducted on swap-execution facilities or other exchanges. Starting Feb. 15, the CFTC will require interest-rate swaps to trade on the platforms and similar requirements for credit-default swaps take effect shortly afterward.

Broad Powers

Former CFTC Chairman Gary Gensler pushed for broad powers to apply such Dodd-Frank rules to overseas trading, citing failures at companies such as American International Group Inc. that originated abroad. The New York-based insurer traded credit-default swaps out of its London offices before requiring a U.S. rescue during the crisis.

An agreement between the CFTC and European regulators would ease the industry’s transition to new regulations and give European authorities more time to implement their own rules, the people said. An agreement would probably give more U.S. recognition to European rules and the platforms that fall under them, one of the people said.

Gensler stepped down in early January when his term expired and the CFTC is now led by acting chairman Mark P. Wetjen.

The CFTC has “made great progress” in talks with European regulators designed to increase coordination of their rules and reliance on each other’s oversight, Wetjen said in remarks prepared for a Senate Banking Committee hearing today. The CFTC has begun to allow non-U.S. lenders and other financial firms to substitute compliance with overseas rules for Dodd-Frank requirements.

“The CFTC may determine that additional foreign regulatory requirements are comparable to and as comprehensive as certain requirements under Dodd-Frank,” Wetjen said.

In its negotiations with European regulators, the CFTC must be careful not to provide an incentive to shift trading away from the U.S. and Dodd-Frank, said James Cawley, chief executive of New York-based Javelin Capital Markets LLC.

“If this isn’t spelled out in detail with respect to pre-trade and post-trade transparency the fear is you could drive a truck through the Sef rules by regulatory arbitrage,” Cawley said in a telephone interview today. Javelin was the first Sef seeking CFTC approval to require trading in many interest-rate swaps to occur on the platforms.

G-20 Compliance

The EU brokered a deal last month on an overhaul of its financial market rules in a bid to apply agreements reached by the G-20. The plans require formal approval by European Parliament lawmakers and national governments in the 28-nation bloc before they can be published as law.

The negotiations on the rules for swap-execution facilities are part of broader work by the EU and U.S. on the interaction of their respective derivatives regulations.

The European commission is in the processing of assessing whether U.S. rules for data repositories and clearinghouses are as rigorous as the EU’s standards, Hughes said. The examination is required under EU law and has implications for whether U.S.-based firms are granted exemptions from some EU rules when seeking to operate in the bloc.

The suit against the CFTC is SIFMA v. U.S. CFTC, 13- cv-1916, U.S. District Court, District of Columbia (Washington).

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